Understanding Credit Reports

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1 Understanding Credit Reports Family Economics & Financial Education Take Charge of Your Finances

Credit Report Detectives Meet Isabella, your new client: About to graduate from college In extreme debt Concerned about finding a job Doesn t understand her credit report YOUR MISSION: Help Isabella

2 Credit Report Detectives Meet Isabella, your new client: About to graduate from college In extreme debt Concerned about finding a job Doesn t understand her credit report YOUR MISSION: Help Isabella understand her credit report, identify what she did to get into this situation, and decide what she can do to improve her credit report. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 2

3 The Credit Process Credit when goods, services, and/or money are received in exchange for a promise to pay back a definite sum of money at a future date. Wants to acquire an item Does not have enough money and wants to borrow from a lender Borrower Lender Person or organization with resources to provide a loan Credit card company, depository institution, etc. If approved by the lender, receives credit Pays the lender interest for the privilege of borrowing Borrower Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 3

4 Isabella s Story IN SMALL GROUPS: READ ISABELLA S SCENARIO What is your analysis of her situation? Does she need your help? Why? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 4

5 Credit History Reporting Lender Credit Reporting Agency (CRA) Credit Report What they do Report consumer s credit transactions to CRA s Keep a record of consumer s credit transactions (credit history) Record created by the CRA of an individual s credit history Additional Information Lender examples: store accounts, credit card companies, utility companies, etc. Agencies include: Equifax TransUnion, Experian If an individual has not acquired credit, they will not have a report Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 5

6 Credit Reporting Agencies Acquire information from: Retail stores that offer credit accounts Credit card companies Mortgage and finance companies Utility accounts Landlords Depository Institutions Cell phone companies Collection agencies Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 6

information to all three credit reporting agencies.

7 Information in a Credit Report Information can be divided into 4 categories: Personal Information Accounts Summary Public record items related to credit Credit Inquiries Lenders may or may not report information to all three credit reporting agencies. An individual s information may be different in each report. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 7

8 Personal Information Personal Information Name and aliases Current and past addresses Social security number Date of birth Employment history FIND ISABELLA S PERSONAL INFORMATION Isabella s Personal Information: Name Isabella G. Langley Addresses 101 Hopeful Ave. & 695 Parent Street Date of birth 05/04/86 Telephone numbers & Employers Lucky s Restaurant & Jane s Daycare Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 8

9 Accounts Summary Accounts Summary Types of accounts Date the account was opened Credit limit or loan amount Account balance Payment history, including missed or late payments WHAT LENDERS DOES ISABELLA HAVE ACCOUNTS WITH? Isabella s Accounts Sam s Electronic World City of Anywhere U.S. Department of Education Financial Institution School Loan Shop Til You Drop Store Credit Card Love to Read Store Credit Card The Free Money Credit Card Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 9

10 Accounts Summary DOES ISABELLA HAVE ANY LATE OR MISSED PAYMENTS ON ACCOUNTS? Isabella s Late or Missed Payments Sam s Electronic World Past due Store Credit Card Occasional late payments Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 10

11 Public Record Items Accounts turned over to collection agencies Public records Bankruptcy Tax liens Legal suits Foreclosures IDENTIFY Public record items related to credit PUBLIC RECORD ITEMS IN ISABELLA S REPORT Isabella s Public Record Items City of Anywhere In Collection Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 11

12 Credit Inquiries Requests for an individual s credit report Completed by: Insurance agencies Potential credit companies Financial institutions Landlords Potential employers, etc. WHAT INQUIRIES DOES ISABELLA HAVE ON HER REPORT? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 12

13 Credit Inquiries Not all credit inquiries are the same! Type of inquiry Soft check Hard check Do they impact your credit score? Examples Not usually Individuals checking their credit reports Credit card companies pre-approving individuals Pre-employment checks Yes Permission given by the individual when seeking credit Credit card Automobile loan Insurance Individuals should avoid too many hard credit checks at one time! Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 13

14 Isabella s Report Inquiries Type of inquiry Soft checks Hard checks Examples A Very Big Bank Need More Credit Keeping You Insured The Dream Sales Job Shop Til You Drop Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 14

15 Medical Information Information NOT allowed on a credit report: Information allowed on a credit report Where an individual was treated What they were treated for Information regarding late medical payments Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 15

Equal Credit Opportunity Act Prohibits credit discrimination on the basis of: Race Religion Marital status Nationality Gender Age Creditors may ask for this information (except religion) in

16 Equal Credit Opportunity Act Prohibits credit discrimination on the basis of: Race Religion Marital status Nationality Gender Age Creditors may ask for this information (except religion) in certain situations, but may not use it to discriminate when deciding whether to grant you credit Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 16

17 Credit Scores Mathematical tool created to help a lender evaluate the risk associated with lending a consumer money Based upon information in the credit report At a particular point in time Numeric grade of a consumer s financial reliability Used by lenders to determine a consumer s risk of defaulting on a loan Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 17

18 Credit Scores Most common scoring system is FICO Credit scores range from , with 850 being the best score WHAT IS ISABELLA S SCORE? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 18

19 Credit Score Impact THIS IS BASED UPON A 30 YEAR FIXED MORTGAGE RATE FOR A $300,000 LOAN FICO Interest Monthly 30 Year Score Rate Payment Amount % $1,787 $643, % $2,047 $736, % $2,500 $900,000 $256,680 saved over the lifetime of this loan because of a good credit score! Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 19

20 How Credit Scores are Determined Five categories of information from a credit report are used: Payment history Outstanding debt Length of credit history Pursuit of new credit Types of credit in use Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 20

21 Payment History The timely manner in which a consumer did or did not repay debt Includes: Several types of credit accounts Late or missed payments Public records and collection items Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 21

22 Payment History WHAT IS ISABELLA S PAYMENT HISTORY? WHAT IMPACT DOES THIS HAVE ON HER CREDIT SCORE? Found in status column Payment history Sam s Electronic World is past due City of Anywhere is in collection Shop Til You Drop has occasional late payments Love to Read was closed and never late The Free Money Credit Card is paid on time Credit score impact Negative Too many late accounts Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 22

23 Outstanding Debt The total dollar amount of debt currently held Includes balances on all reported accounts When a high percentage of debt is used, then it negatively impacts a score Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 23

24 Outstanding Debt HOW MUCHTOTAL DEBT DOES ISABELLA HAVE? HOW MUCH AVAILABLE CREDIT IS ISABELLA USING? WHAT IMPACT DOES THIS HAVE ON HER CREDIT SCORE? Total debt Found in recent balance column $37,325 Available credit Found in credit limit column $37,546 Impact Negative $37,546-$37,325 = $221 she is using almost all her available credit Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 24

history will generally increase a credit score History Family Economics &

25 Length of Credit Length of time a consumer has held credit accounts Includes how long ago credit accounts were established A longer credit history will generally increase a credit score History Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 25

26 WHEN DID ISABELLA FIRST BEGIN HER CREDIT HISTORY? Length of Credit IF ISABELLA KEEPS HER FREE MONEY CREDIT CARD OPEN FOR ANOTHER 10 YEARS AND PAYS OFF THE BALANCE, WHAT WILL HAPPEN? History Credit history Found in date opened column 08/05 U.S. Dept. of Education Free Money Credit Card Score will improve Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 26

27 Pursuit of New Credit Assesses how many accounts have been opened recently and the type of account Includes the number of recently opened accounts as well as requests for new credit Opening too many types of accounts in a short period of time has a negative affect Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 27

28 New Credit HAS ISABELLA PURSUED ANY ADDITIONAL CREDIT SINCE JANUARY 2008? IF ISABELLA ACQUIRED ANOTHER CREDIT CARD AND SHOPPED FOR AN AUTOMOBILE LOAN, WHAT WOULD HAPPEN TO HER SCORE? Additional credit Shop Til You Drop in August 2008 Impact of seeking additional credit Credit score will go down Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 28

29 Types of Credit in Use Analyzes the types of credit in use Credit cards, retail cards, mortgages, automobile loans, etc. Variety is generally good to have Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 29

30 Credit in Use WHAT TYPES OF CREDIT DOES ISABELLA HAVE? WHAT ARE ADDITIONAL FORMS OF CREDIT SHE MAY SEEK? Types Credit card (revolving) School loan (installment) Private school loan (installment) Store cards (revolving) Additional forms Mortgage Automobile loan Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 30

31 Information not included in a FICO score FICO score is only based upon credit use Information not included is: Personal information such as age, where you live, marital status, race, color, religion, national origin, gender Employment information Interest rates charged on accounts Overall wealth (assets an individual may have) These variables may still be considered when a lender reviews a loan application. Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 31

32 Positive vs. Negative Credit Impact Positive Informs the lender a consumer is: Financially responsible Less risk Benefits to the consumer Lower interest rates Access to additional credit IS ISABELLA A POSITIVE OR A NEGATIVE RISK? WHY? Negative Informs the lender a consumer is: Not financially responsible May be a higher risk Impact on the consumer May pay higher interest rates May not be able to qualify for credit May limit employment opportunities Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 32

report 3. Move to the side of the room representing your selected answer 4.

33 Activity - What You Do Makes a Difference 1. Instructor will read a scenario 2. Determine if the scenario will have a positive or negative impact on an individual s credit report 3. Move to the side of the room representing your selected answer 4. Be prepared to explain why Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 33

34 Activity Action: Credit report impact: Joey rented a TV from The Best Deal rent to own store during college The TV was neither returned nor paid for as stated in the contract Negative Joey owes the store the money which was agreed upon in the contract May be responsible for additional fees He may be referred to collections Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 34

35 Activity Action: Sally pays the total amount due on her credit cards each month Credit report impact: Positive An excellent habit for building a positive report Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 35

36 Activity Action: Credit report impact: Fernando rented a DVD from Busting Bronco Rental and never returned the movie Negative Fernando is responsible for the movie replacement Could be reported to collections Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 36

37 Activity Action: Credit report impact: Cassie has received three parking tickets throughout the past year and has not paid them Negative Cassie has probably already been referred to collections Will owe for the parking tickets and additional fees Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 37

38 Activity Action: Credit report impact: Sam acquired a loan from Buy More Credit Union for $1,000 to purchase a motorcycle. He paid the loan back in full and on-time Positive Demonstrated the ability to responsibly use credit Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 38

39 Activity Action: Credit report impact: Corey s credit card bill is paid in monthly installments. However, it is due on the 15 th and usually paid a few days late Negative Although Corey is paying his bill, he is doing so late! Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 39

Positive All payments were made in time Having automatic withdrawals with the money in the account is a good

40 Activity Action: Credit report impact: Kari bought a car and financed it though the Drive Bigger and Better promotion Payments are automatically removed from her checking account Money is always in the account Positive All payments were made in time Having automatic withdrawals with the money in the account is a good practice Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 40

41 Activity Action: Credit report impact: In the past three months, Tammy has applied for credit cards at these establishments: Tarmore, Wally World, JcMoney, and Seemores Negative This is too many inquiries for new credit at one time from a variety of types of stores Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 41

credit may be good, however, Jessica s balances are at the maximum level Family

42 Activity Action: Credit report impact: Jessica has several types of credit cards Each of her credit card balances are at the maximum level Negative A variety of types of credit may be good, however, Jessica s balances are at the maximum level Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 42

Activity Action: Credit report impact: It is 12 months after graduation and Jon has not started paying his student loan back because he has not found a job He has not contacted the loan company

43 Activity Action: Credit report impact: It is 12 months after graduation and Jon has not started paying his student loan back because he has not found a job He has not contacted the loan company Negative Jon is delinquent on the account. If he contacts the loan company, they may be able to work with him Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 43

44 Positive Credit Practices Positive Practice good banking techniques, such as keeping a checkbook balanced, managing accounts online, and not bouncing any checks Pay bills consistently and on time Maintain reasonable amounts of unused credit Apply for credit sparingly, thus keeping credit inquiries to a minimum Check credit reports annually and search for errors Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 44

45 Negative Credit Practices Negative Having non-sufficient funds (NSF) when writing checks, also known as bouncing checks Routinely paying late on credit cards, utility, and cell-phone bills Maxing out limits on credit cards Numerous credit applications in a short period of time Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 45

46 When Credit is not established Although the following are all positive financial habits, no credit is established when: Credit is never used Accounts are not in own name Cash is paid for all major purchases Phone and utility bills are paid on time It only negatively impacts a score if payments are late Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 46

47 Building credit history Important for consumers to build a credit history to be able to purchase items on credit For example house, vehicle Having no credit history may be just as challenging to a consumer as having a negative history Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 47

48 2009 CARD Act Changed how young adults receive certain types of credit To receive a credit card: Generally must be 21 years of age or older UNLESS Show documentation of sufficient income Have a co-signer Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 48

Establishing Credit Strategies to build credit include acquiring and positively managing small lines of credit Co-signer Secured Credit card Require a cash security deposit to ensure payment of the

49 Establishing Credit Strategies to build credit include acquiring and positively managing small lines of credit Co-signer Secured Credit card Require a cash security deposit to ensure payment of the card Small loan from financial institution If someone is a co-signer on a an account, they are equally as responsible and their credit report is impacted. DOES ISABELLA HAVE ANY CO-SIGNERS? WHAT IMPACT DOES HER ACTIONS HAVE ON THEM? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 49

50 Requesting A Credit Report One free credit report annually from each of the three credit reporting agencies Credit scores are available for a small fee Access the website: annualcreditreport.com Calling toll free: Send a written request: Annual Credit Report Request Service PO box Atlanta, GA Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 50

51 Annualcreditreport.com annualcreditreport.com - Only government sponsored Web site Other sites may be fraudulent or charge a fee Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 51

52 Mistakes in Credit Reports Important to check each credit report annually to correct mistakes Two common errors Fraud (identity theft) Mistaken identity When a lender reports a transaction on the wrong person s credit report Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 52

53 Fair Credit Reporting Act Gives consumers the right to review and correct their report If a person is denied credit, they have the right to request their credit report from the credit reporting agency If within 60 days it is free of charge Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 53

54 Correcting Errors on Credit Reports Write a letter To the credit bureau that has the incorrect information and/or the information provider Bureau has 30 days to investigate If investigation is not completed within this time, the information must be dropped from the credit file Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 54

55 Correcting Errors on Credit Reports Incorrect information must be corrected Consumer can request the corrected report be sent to any creditors who viewed the incorrect report Negative information on a credit report Usually removed after seven years Bankruptcy is removed after ten years Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 55

56 Credit Repair Agencies Offer to help a consumer fix his/her negative credit report According to the Better Business Bureau (BBB) and the Federal Trade Commission (FTC): Consumers can do just as good of a job repairing their credit report errors as a fee based debt repair agency Be cautious of debt repair agencies promising instant help because there is no immediate fix for negative credit Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 56

57 Advice Isabella was given From Angie Credit ratings improve as people get older and income increases Isabella s credit score will improve when she: Moves to a better side of town Gets a better interest rate on loans Is promoted From George Shopping around too much for credit is not good because it increases inquiries Opening new accounts, even if not used, provides evidence of credit worthiness Close old accounts, including those with loans not paid on time to wipe the slate clean WAS THE ADVICE GOOD? WHY OR WHY NOT? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 57

58 CREDIT REPORT DETECTIVES ADVICE Will Isabella receive her dream job? What advice would you give Isabella to improve her credit report and score? What should she do immediately? What recommendations would you suggest she employ in the near future? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 58

59 ANY QUESTIONS? Family Economics & Financial Education Revised April 2010 Credit Unit Understanding Credit Reports Slide 59

Credit Reports and Scores

Credit Reports and Scores Advanced Level The Credit Process Credit goods, services, and/or money received in exchange for a promise to pay back a definite sum of money at a future date Borrower Someone